Colorado oil companies shipping crude by rail again

As Colorado’s crude oil production booms, exceeding the capacity of pipelines, energy companies are turning to railroad cars to get the liquid black gold out of state and off to market.

Traditionally, crude oil has moved from field to refinery via the nationwide network of pipelines. But in the last few years, the use of horizontal drilling and hydraulic fracturing (fracking) has boosted oil production to record levels in the United States, and the pipes haven’t been able to keep up with shipping demands.

Rail has proved to be a fast, flexible way to quickly add more capacity, say company executives and industry experts.

In the first half of 2013, nearly 356,000 carloads of crude oil and refined product were shipped via rail in the United States, up 48 percent from the first half of 2012, according to the Association of American Railroads.

The additional capacity is critical to new fields such as Colorado’s Niobrara, because without access to refineries and markets across the nation, the new oil would be bottled up with no way to get to market. The price of the oil would drop, making it more difficult for companies to justify investments in the field, said Adam Bedard, senior director of strategic planning and market analysis for High Sierra Energy LP, a Denver-based company that gathers, transports and markets crude oil and natural gas liquids.

“Difficulty moving crude oil to market would make it difficult for plays like the Niobrara,” Bedard said. “It would limit the ability of the Niobrara to grow without rail.”

Advantages of rail

Rail offers several benefits to energy companies, say executives.

New facilities to take oil off of trucks and load it onto rail cars can be built faster than new pipelines — which can take years — and also faster than converting a pipeline to handle crude oil, Bedard said.

And rail is flexible, Jim Kleckner said when he was vice president of the Rockies division for Anadarko Petroleum Corp. (NYSE: APC). The company in May promoted Kleckner to be Anadarko’s executive vice president of international and deepwater operations.

“Rail is competitive because you can access multiple markets,” he said. “You can go to the Gulf Coast or the West Coast.”

Anadarko, one of Colorado’s biggest oil and gas companies, plans to invest about $1.5 billion in the Denver-Julesburg Basin this year. And the company, along with Noble Energy Inc. (NYSE: NBL), will patronize the largest rail-loading facility in the state.

Houston-based Plains All American (NYSE: PAA) announced in August 2012 it would build a new rail-loading facility about 5 miles east of Keenesburg, at a place called Tampa, along Interstate 76. It’ll open by year-end, and will be capable of loading the equivalent of 68,000 barrels a day — more than a unit train of 100 cars.

Weld County also is home to two other loading facilities.

• Plains All American also has a loading facility in Carr, near the Wyoming border, that can load 15,000 barrels a day. It’s being expanded, and will be capable of handling more than 30,000 barrels a day by year-end, according to a company presentation.

• And when Houston-based Musket Corp. opened its new loading facility in Windsor in October 2012, the company said the station could load up to 12,000 barrels a day — “but will soon be unit-train capable with capacity exceeding 30,000 barrels per day,” according to the company’s announcement.

Musket has been shipping crude by rail since 2007 out of the Bakken field in North Dakota, and was drawn to Colorado to capitalize on the Niobrara’s growth, said JP Fjeld-Hansen, the company’s managing director.

“The Niobrara is a growing field, and as with other large shale plays, there is limited takeaway capacity on the pipelines to move the crude from that area to the markets that need it,” Fjeld-Hansen said.

“With our success in loading crude to rail and our growth in North Dakota, we applied the same logistics principles for the Niobrara in Colorado,” he said.

Fjeld-Hansen said he expects Musket’s Windsor facility will fill three or four unit trains a week as Niobrara production continues to climb.

Derailment in Canada

Supporters of shipping crude by rail say the railroads have a good track record on safety — despite a devastating derailment of a train carrying crude oil that killed 47 people in the town of Lac-Mégantic, Quebec, Canada, on July 6. Canada’s Transportation Safety Board is investigating the accident.

Musket recently held a drill with the Greeley and Windsor fire departments that went “very well,” Fjeld-Hansen said.

And, according to Mark Davis, a spokesman for Union Pacific Corp. (NYSE: UNP), based in Omaha, Neb., “Traveling and moving shipments by rail is the safest way to do it, particularly hazardous rail shipments.”

Statistics assembled by the American Association of Railroads show that between 2002 and 2012, railroad accidents spilled 2,268 barrels of oil, compared to 474,441 spilled by pipeline leaks.

Union Pacific shipped 140,000 carloads of oil in 2012, up 460 percent from 25,000 in 2011. It also serves the Carr facility on the Colorado-Wyoming border.

Davis said the railroad is watching the investigation of the Quebec accident, and that Union Pacific has “long been a leader in developing programs that improve safety.”